Anatomy of the Deal – Managing the HRO Service Provider Portfolio

A sign of economic recovery is preparation for the future and a return to investing in growth and expansion over cost cutting and containment. A purchase may be the fastest way to growth for HRO service providers, if the price is right and the risks manageable. And the first half of 2010 has been busier with large and small mergers and acquisitions in the HRO universe than with major new client deals. 

Today let’s take a look at the similar strategic criteria I see that cross several recent HRO acquisitions: footprint, portfolio, profile, talent and technology.

Footprint – expand into new geographies by buying an established “local” player. NorthgateArinso just closed on its purchase of Convergys, greatly expanding its footprint in the U.S., the world’s largest HRO market. It also purchased Neller, an Australian-based payroll provider to increase its global payroll coverage in the Asia Pacific region.

Portfolio – what services should you offer? Acquisition for portfolio management is seen as part of the ACS purchase of ExcellerateHRO (EHRO) from Hewlett Packard. According to ACS Managing Director Rohail Kahn, ACS intends to be a top industry leader in each of its lines of businesses. ACS will add to its heft as a benefits administrative player with the addition of EHRO, which was a strong benefits admin provider going back to its start with Towers Perrin.

Rounding out a service line is also a reason cited in recent acquisitions. Hewitt’s purchase of HRAdvance adds strength to its growing dependant audit services as part of its point solution offerings within its larger benefits admin portfolio.

Profile –marquee “logos” and major clients adds scale and is a common reason for M&A activity, but it is one that requires a clear head and due diligence. Last year Empyrean Benefits announced it was going to acquire the benefits unit of ING. A few months later the deal fell apart when it became clear to Empyrean that several major clients were already on the way out the door. The closing of the Convergys deal is a sign that NorthgateArinso felt a good sense of security that enough of the major clients will stay and give NorthgateArinso a chance. ACS also mentioned a stable client base as one of the advantages of the EHRO deal.

Talent and Technology – both can be an important consideration in purchase decisions. Praise for the leadership and talent base of the acquired company is practically a requirement in the M&A communications handbook. It is another thing to determine if it is true in action as well as words. Another common reason for M&A’s is synergy, i.e., reducing operating expenses by eliminating duplication and overlaps.

Technology can be the point of, or a problem rather than a benefit, in some M&A’s. In the case of Hewitt, it will adopt HRAdvance’s technology platform, which was a criteria it was seeking in an acquisition. 

More often, that which cannot be profitably and practically integrated must be separately maintained or clients migrated. Either way, the time, cost and effort must be factored into the financials and risk management of the deal.

2010’s HRO service provider deals have good bones and clear intentions, may they all grow hale and hearty for themselves and their clients!

Linda Merritt, Research Director, HRO, NelsonHall

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